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In order to understand the determination of all the variables in the Classical model, let us first understand, what the classical model is.
The classical model:
Assumptions taken into consideration for determination of all variables in the Classical Model:
1) The economic agents make the decision about how much to buy or sell, in order to maximize the utility;
2) Every economic agent has the same information of prices;
3) Prices of the goods are flexible which help in market-clearing level;
4) There is an imaginary auctioneer who ensures that goods are not traded till the market-clearing price has been agreed upon;
5) Agents have a stable expectation.
How do the determinations of all the variables in the classical model take place?
In the classical model, perfect competition is the characteristic of market. W and P are not affected, where W is the money wage, P is the absolute price level, and W/P is the real wage. The total demand for labor is calculated by summing up the individual labor demands, which is the requirement of the firms.
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